UPS Faces Short-Term Challenges but Long-Term Growth Potential
United Parcel Service (NYSE: UPS) recently experienced a price target reduction by a Citigroup analyst, lowering it from $158 to $149 while maintaining a Buy rating. While this downward revision may seem like a setback, the new target still represents a 32% upside from the current stock price. This suggests that the recent sell-off in UPS shares could present a buying opportunity for long-term investors.
Despite near-term revenue challenges, UPS is actively restructuring its business strategy by reducing its reliance on Amazon (NASDAQ: AMZN), focusing instead on higher-margin deliveries in the healthcare sector and small-to-medium-sized businesses (SMBs). This transition aligns with UPS’s long-term strategy of prioritizing profitability over volume growth.
Why Did UPS Stock Decline?
The decline in UPS stock came after its fourth-quarter earnings report in late January, where the company announced a major shift in its relationship with Amazon. The delivery giant agreed to cut Amazon shipments by at least 50% by the second half of 2026.
Since Amazon deliveries accounted for 11.8% of UPS’s total revenue in 2024, this reduction will have an immediate impact on revenue figures. As a result, UPS has forecasted 2025 revenue of $89 billion, down from $91.1 billion in 2024.
However, the company expects its adjusted operating profit to grow by about 8%, indicating that the restructuring efforts may improve overall profitability.
Why UPS’s Amazon Cutback Is a Positive Move
1. Focus on Higher-Margin Deliveries
UPS’s decision to scale back Amazon shipments aligns with its “Better, Not Bigger” strategy, which aims to focus on more profitable delivery services rather than just increasing shipment volumes.
Amazon’s shipping needs involve high-volume, low-margin residential deliveries, which can strain logistics networks and drive up costs. By reducing reliance on Amazon, UPS can reallocate its resources to sectors where it can charge higher rates and generate better margins.
UPS is actively targeting growth in:
✔ Healthcare logistics – A fast-growing sector with high-value, time-sensitive shipments.
✔ Small and medium-sized businesses (SMBs) – These businesses require customized logistics solutions that UPS can charge premium prices for.
✔ International markets – Expansion in regions with higher shipping profitability.
2. Strengthening Profit Margins
While the reduction in Amazon deliveries will temporarily lower revenue, it is expected to enhance UPS’s profit margins. Delivering to residential addresses is typically less profitable than business-to-business (B2B) shipments.
By reducing lower-margin deliveries, UPS can optimize its logistics network, lower operational costs, and improve overall profitability.
3. Market Positioning and Competitive Advantage
UPS remains one of the largest logistics and parcel delivery companies in the world. By focusing on its core business strengths, it can better compete with FedEx (NYSE: FDX) and emerging logistics startups.
Additionally, UPS’s ability to adapt to market changes while prioritizing efficiency and profitability makes it an attractive long-term investment.
Citigroup’s Price Target: What Investors Should Know
Despite the stock’s recent pullback, Citigroup’s new price target of $149 still reflects a strong upside potential. The current valuation suggests that investors may have an opportunity to buy UPS shares at a discount before the company’s strategic initiatives drive long-term growth.
At just 14 times projected 2025 earnings, UPS stock remains reasonably priced compared to the broader market.
Potential Risks to Consider
📉 Execution Risk – UPS will need to successfully reallocate resources and expand in key areas to offset the loss of Amazon revenue.
📉 Competitive Pressure – Rivals like FedEx, DHL, and Amazon’s own logistics division continue to disrupt the delivery market.
📉 Macroeconomic Conditions – A potential economic slowdown, higher fuel costs, or changes in global trade policies could impact demand for shipping services.
Should You Invest in UPS Stock Right Now?
✔ UPS is focusing on more profitable, high-growth sectors such as healthcare logistics and small-business shipping.
✔ The stock remains undervalued compared to its long-term earnings potential.
✔ UPS’s shift away from Amazon dependency could result in higher profit margins and improved operational efficiency.
While short-term revenue declines may concern some investors, long-term profitability remains strong. The 32% upside potential suggested by Citigroup’s revised price target makes UPS a compelling buy for long-term investors.
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